Real Time Economics: Can the U.S. and China Strike a Trade Deal?

China's official manufacturing index ticked lower in November, a sign the sector may be stalling.
Photo:
str/Agence France-Presse/Getty Images

Nov 30, 2018 5:13 am ET

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Presidents Trump and Xi are set to meet Saturday to talk trade just as China's economy shows more signs of slowing.

Good morning. Jeff Sparshott here to take you through key developments in the global economy. We'll look at the upcoming Trump-Xi summit, why both sides might want a tariff truce, signs of flexibility from the Fed, soft inflation, and rising jobless claims. Let us know what you think by replying to this email.

LET'S TALK

The U.S. and China are exploring a trade deal: Washington would hold off on further tariffs in return for new talks looking at big changes in Chinese economic policy. The negotiations are coming to a head just before President Trump and Chinese President Xi Jinping meet Saturday in Buenos Aires. But it's far from clear if the discussions will produce an agreement, Bob Davis and Lingling Wei report.

It isn’t clear what specifics the U.S. is asking for—or what Beijing is willing to entertain. If the sides get a short-term deal, they'll move on to trade “architecture,” a broad term that could encompass intellectual property protection, coerced technology transfer, government subsidies, and even non-trade issues such as cyberespionage.

WHAT TO WATCH TODAY

President Trump spends the day in Buenos Aires for the Group of 20 summit . He's scheduled to meet with leaders of Argentina, Japan, India, Australia, and sign an updated North American trade deal.

Canada's gross domestic product for the third quarter is out at 8:30 a.m. ET.

The Chicago purchasing managers index for November, out at 9:45 a.m. ET, is expected to fall to 58.0 from 58.4 a month earlier.

The New York Fed's John Williams speaks on the global economy at 9 a.m. ET.

TOP STORIES

WHY CHINA MAY NEED A DEAL

China's economy isn't doing great. The official manufacturing index showed no expansion in business activity for the first time since mid-2016. Sales prices fell for the first time since March. Most concerning: the gap between output and new orders is now at its widest since early 2017—Chinese factories are producing more than they are selling, Nathaniel Taplin writes.

It's not just factories. The labor market looks shaky—both manufacturers and service companies shed workers this month. And even in construction, the pace of gains was the weakest since June. China’s strong property market and construction sector have been the main factors warding off a deeper downturn and bigger debt problems—if that now goes, the country will be in serious trouble.

WHY THE U.S. MAY WANT A DEAL

Tariffs and trade tensions are stinging sectors of the U.S. economy, from farmers to auto factories. Now, they've snared a miner. Mountain Pass mine is the only current U.S. source of rare earth minerals—critical to high-tech applications, including military equipment.

Good news: The Trump administration wants the U.S. to stop buying key minerals overseas.

Bad news: Mountain Pass ships its ore to China for processing and refining. After Washington announced tariffs on Chinese imports, China retaliated with its own—including tariffs on Mountain Pass ore.

Bottom line: The tariffs are eroding profit margins. That eats into the money Mountain Pass would reinvest to upgrade the facility so it can process the rare earths itself, Timothy Puko reports.

TO DEAL OR NOT TO DEAL

President Trump channeled his inner Hamlet before heading off to the G20: "I think we're very close to doing something with China, but I don't know that I want to do it because what we have right now is billions and billions of dollars coming into the United States in the form of tariffs or taxes. So I really don't know. But I will tell you that I think China wants to make a deal. I'm open to making a deal. But, frankly, I like the deal we have right now."

U.S. tariffs on $200 billion in Chinese goods are set to rise to 25% from 10% on Jan. 1. Mr. Trump has threatened additional tariffs on the rest of China’s $505 billion in imports to the U.S.

WHAT ARE THE ODDS?

What will the Trump-Xi summit produce? Here are four possible scenarios and their odds via Nomura:

30% chance: No agreement, the U.S. raises tariffs on $200 billion in Chinese goods and Mr. Trump threatens tariffs on the remaining $267 billion.

35% chance: An agreement to pursue further talks but few specifics. The U.S. raises tariffs on $200 billion in Chinese goods.

30% chance: A broad framework for future talks, China offers concrete pledges to increase imports and open its markets, and the U.S. agrees to delay additional tariffs.

The Federal Reserve has raised rates by a quarter-percentage point every three months over the past year. Officials appear ready to follow that pattern with another increase next month. After that, they're flexible.

Since January, Fed statements have said “further gradual increases” in short-term rates would be necessary. But at their last meeting, officials debated whether to change that phrase to stress their next few moves would depend more on the most recent data, Nick Timiraos reports. “Such a change would help to convey the committee’s flexible approach in responding to changing economic circumstances,” minutes from the meeting said.

WHY THE FED CAN WAIT

The Fed's favorite measure of inflation softened in October. The personal consumption expenditures price index, excluding volatile food and energy prices, rose 1.8% in October from a year earlier. That's down from September and August and suggests little price pressure despite solid economic growth, historically low unemployment and signs of accelerating wage gains.

KEEP AN EYE ON CLAIMS

Weekly claims for unemployment benefits jumped last week to the highest level since May. Claims had touched an almost half-century low in September but have since crept up. That could be a sign the labor market is cooling. It could also just be noise in the notoriously volatile indicator.

TWEET OF THE DAY

Xi Jinping has committed 2 cardinal errors. Losing the support of US especially but also EU businesses, and misreading the fortitude of the WH on prosecuting this trade conflict. Major fails. Someone’s going to pay for this, and it’s a loooong way back for XJP 3/n

Republicans may have messed up when they made a U-turn on free trade. "Trump's own views on trade, however incorrect, are long held and appear genuine. But many elected officials have adopted the Trumpian stance, thinking in part that they are representing the views of a majority of their constituents. It may be that they aren’t," Michael R. Strain writes at Bloomberg Opinion.

U.S. businesses are going to hire foreign workers. The big variable is where. "[R]estrictions on H-1B immigration caused increases in foreign affiliate activity at both the intensive (US multinationals employed more people at their foreign affiliates) and the extensive (US multinationals opened more foreign affiliates conducting R&D) margins," Carnegie Mellon's Britta Glennon writes in a job market paper. "Restrictions also caused increases in foreign R&D and foreign patenting, suggesting that there was also a change in the location of innovative activity."